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Choosing the right mortgage

Selecting the right mortgage can make a big difference in your monthly payments and the overall cost of your loan.

Do your homework about the different types of mortgages and ask your loan officer plenty of questions. Ask how each option may change your monthly payments now and in the future. Your loan officer is here to make the process and options easy to understand.

There are two main types of mortgages – fixed-rate and adjustable-rate – that each have their own sets of features and benefits that may align better with your needs.

Fixed-Rate Mortgages

Fixed-rate mortgages are the most common type of mortgage selected by homeowners today. With a fixed-rate, you are locked in to a set interest rate. This means your monthly mortgage payments will remain the same for the entire life of the loan, whether 15, 20, or 30 years.

The primary benefit of a fixed-rate mortgage is inflation protection – meaning that if rates increase in the future, your mortgage rate will not change.

When selecting the term of a fixed-rate mortgage, take into consideration the features and benefits of each.

  • 30-year Term – With this, your monthly payment will be lower due to the extended period of the loan, but your interest rate is typically higher and you pay more interest over time.
  • 15-year Term – With this, you have a higher monthly payment because the loan term is significantly shorter; however, you can build equity much faster than with a 30-year fixed rate mortgage and pay less interest over the life of the loan with a lower rate.

Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) is a loan with an interest rate that changes. ARMs may start with lower monthly payments than a fixed-rate mortgage.

An adjustable-rate mortgage differs from a fixed-rate mortgage in many ways. Most importantly, with a fixed-rate mortgage, the interest rate stays the same throughout the life of the loan. With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may fluctuate slightly up or down accordingly.

In general, you will be charged a lower initial interest rate for an ARM versus a fixed-rate mortgage. Initially, an ARM is easier on your pocketbook than a fixed-rate mortgage would be for the same amount. Your ARM could potentially be less expensive over a long period than a fixed-rate – for example, if interest rates remain steady or move lower.

How ARMs work:

  • Initial rate and payment – The initial rate and payment amount on an ARM will remain in effect for a limited period – ranging from 3, 5, 7 or 10 years. For some ARMs, the initial rate and payment will vary from the rates and payments later in the loan term. If the APR (annual percentage rate) is significantly higher than the initial rate, it is likely that your rate and payments will be higher when the loan adjusts.
  • The adjustment period – With most ARMs, the interest rate and monthly payment change every 3 years, 5 years, 7 years or 10 years. The period between rate changes is called the adjustment period. For example, a loan with a 3-year adjustment period is called a 3-year ARM.
  • The index – The interest rate on an ARM is made up of two parts: the index and the margin. The index is generally a measure of interest rates and the margin is an extra amount that the lender adds. If the index rate moves up, so does your interest rate in most circumstances, and you may have to make higher monthly payments. On the other side, if the index rate goes down, your monthly payment could go down.
  • The margin – To set the interest rate, lenders add some percentage points to the index rate, called the margin. The amount of margin is constant over the life of the loan.

ARMs have more aspects to them and can be harder to understand. If you are interested in an ARM, contact one of our loan experts and they can walk you through the details.

Apply Now to start the application process and one of our trusted loan professionals will work with you to determine the best option to fit your needs and explain your options further.

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